As in Wisconsin Law Journal
For attorneys who never have heard of the Financial Industry Regulation Authority before, now might be a smart time to learn the basics. Wall Street has been a tumultuous place of late, and chances are, sometime soon a client will lament losing his shirt because of a broker’s bad calls. Or, perhaps a client who is a broker will need help taking on investors who think he’s responsible for their accounts tanking.
The following is a primer on FINRA arbitration for lawyers who don’t concentrate in securities. After all, as the character Gordon Gekko famously said in the 1987 film “Wall Street,” “The most valuable commodity I know of is information.”
1. Wall Street issues = busy FINRA lawyers and neutrals
FINRA provides mandatory alter-native dispute resolution for investors suing their brokers, alleging securities fraud or stockbroker misconduct.
“Whenever there’s a big loss in the stock market, you’ll see an increase in claims,” said Brian Mahany, of Mahany & Ertl LLC, Milwaukee.
Typically there’s a delay of a year or two after a loss before investors make claims.
“They finally decide to do something about it, or they just didn’t notice right away,” explained Milwaukee lawyer Sean Sweeney of Halling & Cayo SC. “I think we’ll continue to see a spike for the next year or so.”
Claims brought under the Securities and Exchange Act of 1934 have been all but precluded from lawsuits, Sweeney said, since the U.S. Supreme Court in 1987 held, in Shearson/American Express Inc. v. McMahon, that such claims can be resolved through arbitration.
FINRA also offers mediation, he said, which is best for smaller claims or pro se parties. But, Sweeney said, he typically opts for arbitration.
“The broker/dealers tend to take a pretty aggressive stand on these cases,” he said. “They generally litigate.”
2. Neutral selection is a key strategy call.
Cases where the amount in controversy is less than $100,000 are decided by one neutral. When the dollar amount is higher, a three-neutral panel is selected.
FINRA maintains an arbitrator roster, members of which all have passed a qualifying examination and received training. Those on the roster are classified as either public or industry members and public members need not have worked in securities his firm kept a database of neutrals’ past decisions to see whether someone consistently finds for one side.Parties then are given a list of neutrals and can strike individuals, while ranking the remaining options.
Traditionally the three-member panels always had at least one industry person. But in 2008, the agency tried a pilot program where investors could choose panels of three public members, or panels where they could select the industry person. This February, the Securities and Exchange Commission made all-public panels a permanent option.
3. The guiding law is a hybrid of state and federal precedents.
Common-law negligence or fraud cases can be helpful. Sometimes there’s a cause of action under the Wisconsin Uniform Securities Law or federal securities regulations.
“What’s interesting,” Sweeney said, “is there’s not a huge body of case law out there, because there’s generally no right to an appeal. So you have a lot of different ‘law’ applying, such as FINRA notices to members, where brokerage firms are reminded about the rules for selling, for example.”
The hybrid of precedents is tricky, he said, because there’s no one resource for all the law. Further complicating matters, Sweeney said, is that FINRA has varying statutes of limitation for the varying causes of action. Breach of fiduciary duty has a three-year statute of limitations, recently raised from two years.
The complexity makes it a difficult area for general practitioners to try, Sweeney said.
Madison attorney Terry Peppard, a veteran FINRA arbitrator, said arbitrators “don’t need schooling in the fine points of the law or related regulations and standards,” however.
“Instead, experienced attorneys concentrate on bringing out the facts that will turn the case,” he said.
4. Discovery and hearings are limited.
FINRA requires the use of discovery templates for the most prevalent causes of action, Mahany said.
If that doesn’t work, a motion to compel through FINRA is possible.
“It’s very limited,” Sweeney said, “and it can be a constant fight to get what you want.”
There are no depositions or requests for admissions, he said, and brokers tend to be protective of their documents, seeking and often getting protective orders for everything.
The hearing, which typically lasts three days, Sweeney said, often is the first time the arbiter speaks to the broker.
Because there have been no depositions, he said, testimony occasionally goes in unproductive directions. Brokers and their agents are subject to FINRA subpoena power, but if an independent accountant is involved, for example, that person might not cooperate and a court order might be needed to compel their appearance.
The panels frequently are amenable to attorneys making short opening and closing statements, Mahany said, something he makes use of when possible. Experts often are required unless it’s a highly fact-intensive case.
With regard to evidentiary objections, Peppard said, a statutory ground for vacating an arbitrator’s award is refusal to hear evidence “pertinent and material to the controversy.” For this reason, veteran arbitrators often don’t sustain objections unless they are based in, for example, legal privilege, the attorney’s work product doctrine or the law of trade secrets. Excessive objections to relevance won’t help the client, he said.
5. Fairness is paramount.
Typically, the decisions simply state a conclusion and damages, if any, without a rationale.
A decision can be challenged on the basis that the arbitrators exceeded their authority or manifestly disregarded the law, but that’s difficult to prove, Sweeney said.
Mahany said he never has had to challenge a decision in more than 25 years of FINRA arbitration because he generally gets fair results.
“They do a good job,” he said. “It’s a fair process.”
Not everyone, however, finds the process fair, Mahany said.
“I’ve heard detractors of the FINRA arbitration say that it’s biased because claimants win only half the time, or less,” he said. “But that’s only considering the ones that go to hearing. Many more settle beforehand.”
Mahany said most of his cases settled before the hearing.
“It’s like traditional litigation,” he said. “The more prepared you are for trial, the less likely you are to go to trial.”
Fairness begets fairness, Peppard said.
“Lawyers who demonstrate fairness in all aspects of the arbitral process are likely to make the best impression on arbitrators,” he said. “Having built up the client’s fairness ‘bank account’ matters when the arbitrator is called upon to sort out contending positions on points of procedure, and even when the arbitrator must decide how best to allocate the costs of the proceeding among the parties in the final award.”